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IP Protection is Key to U.S. Job Creation

Conventional wisdom would lead one to believe that small businesses create most jobs in the United States. It is a widespread popular perception, but perhaps an inaccurate one. According to a 2013 study in the Review of Economics and Statistics, it is young firms, startups, that are the lifeblood of job creation.[1] While the study does find some evidence in support of the belief that small businesses create most jobs, their most striking finding is that although startup firms account for a mere three percent of U.S. employment, they are responsible for almost 20 percent of gross job creation. Moreover, the authors hypothesize that “the volatility and apparent experimentation of young businesses . . . is critical for the development of new products and processes that are in turn used by (and perhaps acquired by) the large and mature businesses that account for most economic activity” in the United States. Both of these elements speak to the tremendous importance of young firms to U.S. job creation.

Job creation must be examined through the lens of “what kind of jobs?”. While all job creation is valuable to continued economic growth and development, high-skilled, well-paying jobs are the most impactful for sustained economic progress. Evidence suggests that intellectual property (IP) intensive industries are critical to economic growth and vital to national well-being and global competitiveness. Pham (2010) analyzes the role of innovation and the impact of intellectual property rights on U.S. productivity, competitiveness, jobs, wages and exports. [2] His results clearly point to the importance of IP-intensive industries to economic prosperity. The table below illustrates the distinction between IP-intensive and non-IP-intensive industries, across a range of metrics.

As shown in the above table and further described in Pham’s study, IP-intensive industries sustain greater long-term economic growth, generate trade surpluses, and pay both highly-skilled and low-skilled employees at higher rates than non-IP-intensive industries. These findings confirm the importance of innovation and intellectual property to job creation, higher wages, exports, and sustained economic growth, further emphasizing the need for a hospitable environment for innovation.

This shouldn’t be news to anyone. More than 50 years ago, Nobel Laureate[3] Robert Solow’s analysis demonstrated that more than 80 percent of the growth in U.S. output per worker has historically come from technological innovation. Previously, economists believed that capital and labor were the primary drivers of economic growth. Solow’s sources-of-growth-accounting continues to be used to estimate the separate effects of labor, capital and technological progress on economic growth.[4]

Robert Solow also first developed a model of economic growth that accounted for capital of different vintages. His insight was based in the idea that new capital is more productive and valuable than old capital because it is produced with known technology. newer, improved technology. Given that technology is constantly improving, new capital draws on more recent, improved technology, embodying the most cutting-edge innovations. Innovation remains the truest, most reliable source of American prosperity and small startup firms are the greatest source of innovation.

The question then becomes how can the United States attract and create these firms and these jobs? The answer is that innovation must be protected and rewarded. Consider the biopharmaceutical industry, an industry characterized by particularly risky and expensive innovation. According to a 2014 report from the Tufts Center for the Study of Drug Development, on average, the cost to develop a new drug and win FDA marketing approval is now close to $2.6 billion.[5] Beyond these financial resources, firms must devote the skills of talented scientists and more than 12 years to the process. Admittedly, these estimates are controversial, but even if the funding required is a fraction of $2.6 billion, it’s still a tremendous investment. Without the prospect of market exclusivity and the ability to earn a return – that is, without intellectual property protection – the investment won’t be made. According to the 2008 Berkeley Patent Survey of Entrepreneurs, 76 percent of venture-backed entrepreneurs and 67 percent of all entrepreneurs claim that patents are absolutely essential to obtaining funding.[6]

Strong, effective intellectual property rights foster innovation. Innovation creates sustained economic growth. Economic growth creates jobs. If policymakers are serious about creating high-skilled jobs in the United States and growing the U.S. economy, a strong intellectual property rights regime is a clear prerequisite. A commitment to U.S. jobs starts with a commitment to effective IP rights.

The Author

Kristina M. L. Acri née Lybecker
is an Associate Professor of Economics at Colorado College in Colorado Springs, and Chair of the Department of Economics and Business. She earned a B.A. from Macalester College, with a double major in Economics and Latin American Studies, and received her Ph.D. in Economics in 2000 from the University of California, Berkeley. Dr.Acri's research analyzes the challenges surrounding intellectual property rights protection in innovative industries: incentivizing pharmaceutical research and development especially on neglected diseases, addressing the difficulties of strengthening intellectual property rights protection in developing countries, battling the problems related to pharmaceutical counterfeiting and the unique nature of protection for biotech therapies. Recent publications have also addressed alternatives to the existing patent system, the balance between pharmaceutical patent protection and access to essential medicines, and the markets for jointly produced goods such as blood and blood products. Kristina has testified in more than a dozen states on the economics of pharmaceutical counterfeiting. She has also worked with US Food and Drug Administration, Reconnaissance International, PhRMA, the National Peace Foundation, the OECD, the Fraser Institute, the Macdonald Laurier Institute, and the World Bank, on issues of innovation, international trade, and corruption.

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There are currently 1 Comment comments.

BennyMarch 24, 2015 7:56 am

“… they are responsible for almost 20 percent of gross job creation”
Since many startups are fairly short-lived (3 years ?) the are probably responsible for a high rate of job loss, too. In other words, they create turnover in the employment market (which in itself has benefits, in cross-pollenating ideas), but doesn’t actually increase the size of the market.

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